FWIW # 35 Theatre of the Absurd

Washington can sadden an observer more than many realize. This comedy about the debt limit issue is a prime example. The Democrats thought the Republicans couldn’t find a position to negotiate with, but now that they have, the Democrats say it’s not fair. The Democrats want many spending items wrapped up in their debt limit requests (using some of the extra debt capacity), while the Republicans want spending discipline that would put a crimp in the Democrats’ social spending programs. Both sides blame each other for the impasse while the Democrats and the secretary of the Treasury flood the airwaves with dire warnings that the country will disintegrate before our eyes as the US runs out of money and defaults on $31 trillion in debt. All the while, all parties say the country will not default. The media propaganda about the dire consequences for citizens is disgusting.

Washington is doing what it does best: getting the public to fear for their livelihood while promoting pet spending actions that have nothing to do with the debt limits. What is most interesting is Speaker McCarthy has promised his caucus three days to read the bill prior to voting on it. This is a radical change in procedure from the past couple of decades. How can an observer tell this is all theater? By understanding the media and the politicians aren’t saying the elected representatives, the president, and the rest of the executive branch won’t get paid unless the debt ceiling is raised. They know it will be. Shame on the politicians and the media for unnecessarily stoking fear in the general public for nothing except their petty political games. If there is anything good coming of this charade, it’s the fact the 10-year US Treasury yield has risen to 3.76%.

The president and leaders of Congress know they will cut a deal in which both sides get some of what they want, and in conference the settlement will be put together and sent back to both houses. The Senate will pass it handily, and in the House most Republicans (less the Freedom Caucus), along with the necessary additional Democrats, will pass the compromise. The US won’t default. The scare tactics by the Democrats and Republicans will be forgotten as the country sinks deeper into debt.

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I’ll say it again: current computer power, along with AI, can filter through the historical activity on Capitol Hill and the White House and zero in on the strategy used during the Clinton administration that led to a balanced budget. Remember, it was a Republican president (George W. Bush) and a Republican Congress that did not renew the agreement Republican President George H. W. Bush and a Democratic Congress made that led to the sound fiscal policy. Shame on these present elected representatives for failing to do what is possible to reduce or stop deficit spending.

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A word about the investment markets. If, and it is a big if, the Fed is serious about dampening inflation, it won’t be required to raise interest rates again, just to hold steady while it continues to reduce its balance sheet. Inflation is not a supply chain problem. It’s not a demand problem. Inflation stems from no discipline by the Fed in growing the money supply. A government can’t spend over $7 trillion fighting senseless and unwinnable wars, solve all a country’s social problems, pay billions in corporate welfare, and waste money on unproven climate issues while maintaining disciplined money supply growth. If the Fed restored discipline to its policies, it wouldn’t be required to raise interest rates; the markets would balance the supply of and demand for money, which is the true neutral rate. More than anything, good businesses would have access to capital, while bad businesses, that never should have been funded and would not have been funded without irresponsible Fed policies, would falter and disappear.

No matter what the media, donors/borrowers, and politicians say, shrinking the balance sheet will cause economic disruption and higher interest rates.

No one, including me, knows what will happen in the stock market. I do know that the Fed, which now has an abundance of Biden-appointed members, will be conflicted between following the mandate for full employment and maintaining the dollar’s value (reducing inflation). Many believe the stock market is staying up because of a soft landing in the economy while inflation comes down. My research indicates the market is reflecting the belief the Fed under President Biden will talk a lot about reducing inflation, but its actions will not reflect the talk. The longer the Fed allows inflation to stay at these levels, the more it helps the federal government and the Democratic donors/borrowers and devastates the middle and lower income groups in the country. Owning stocks over the longer term will offset most of the inflation created by the Fed even if the market declines in the near term. Now is the time to determine a fair price for your favorite companies. Build liquidity, have a target price for the companies you want to own, and be prepared if events put pressure on the markets.